Part 5

How To Operationalize Hedging at The Level of The Individual Investor

There are now more ways than ever that you can manage your risk with precision and surety. If the derivatives things wigs you out, then don’t worry. We wouldn’t necessarily disagree with that impulse, as successful deployment of derivatives strategies requires a massive investment of time and mental energy in most cases. We will spend more time in the following guide on helping you develop strategies to identify relatively cheap protection. However, we’d like to focus on some of the more accessible ways to purchase protection.

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One of the more popular ways to buy protection specifically against drastic moves to the downside has been the use of the famous fear index, or Volatility Index ($VIX.X). Deploying this to benefit your portfolio without identifying derivatives contracts yourself is now possible through many ETFs that derive their assets from the price of the VIX. In some cases, for large-cap names, you can even buy a volatility index on an individual stock.

However, it is essential to remember that these ETFs are not based on the price of a stock but rather the VIX options. VIX ETFs are a great example of why you have to be VERY careful when using ETFs to hedge positions. The correlations and performance of the ETF prices may deviate substantially from the underlying security, instrument, or group of securities they purport to mimic the price movement of.